Voices: Harley Feldberg: the pulse of the industry

Sometimes, the best way to get the pulse of the industry is to talk with electronics distributors who are out there on the street every day. Recently, EDN spoke with Harley Feldberg, president of Avnet EM (Electronics Marketing), about the economic situation, the growing role of Avnet in the design community, and the changing role of Asia in the industry. Portions of that interview follow. For more, see "Staying above the fray" and "Demand grows for distributor-demand creation".

Are you concerned about the economic slowdown?

That’s obviously the big question. I think the market, in lieu of good news, has been assuming bad news. The technology industry has been adopting a half-empty posture. After [our December analyst] conference call, we have one-on-one [calls] with the top analysts that follow our stock. That’s where you get into the more meaningful questions and, in those one-on-ones, they generally asked, 'Are we concerned?’ Of course we are concerned. All we can do because we are not economists, though, is relay what we are actually seeing. Now through the December quarter, we’re just not seeing indicators [of a significant slowdown]. We’re not seeing evidence of cancellations. We’re not seeing unusual pricing pressure. It’s really just a normal, rational market.

So, you have no concerns about inventory or leadtimes with the economic situation?

No. I think the only concern that I have is if we go into a severe global recession. Again, I’m not an economist, but we don’t see that on the horizon. We really see pretty steady leadtimes, pricing, and demand. Are we concerned about the United States going into a gigantic recession that would impact citizens’ purchasing of electronic things, which would impact our business in Asia? Of course we are. But at least through December, we don’t see any indicators of that.

Are there any technology areas of special interest in the coming quarters for Avnet?

We’ve been filling out our line card in two areas. One [is] where there are major suppliers that don’t have a major presence in distribution but are important to our customers. We’ve been working with those guys. Our announcement about Maxim is a good example. [The company has] always been a valuable supplier to our customers but heretofore has not been a big participant in the channel. It’s not a new product line to us, but it’s a new way of doing business. It’s an expansion with a large suppler that previously wasn’t a player.

How important is Japan for Avnet’s future growth?

I always struggle to find a precise answer [to that question] because it is easy to be wrong. Numerically, as a market, it’s a similar size to [that in the United States] and Europe, which makes it very attractive. Culturally, it’s a market that does things differently from the West. So, if I’ve learned anything in the couple of years we’ve been focusing on Japan, it’s patience. [Japan] is important, but it must be taken in the proper context. I wouldn’t suggest we forecast 100% growth in 2008. We are growing, we’re adding product lines, we are looking at potential acquisitions and partners, but I always temper those comments [by reminding people] that it’s one [market] that requires time and patience. Ultimately, it will be a big market for us. The question is how long it will take.

You and Chief Executive Officer Roy Vallee have often spoken about balancing Avnet’s growth globally. Yet it seems as though a lot of your business lately has been coming from Asia. Is this situation a red flag for you?

Not really, but it is a reality that we have to accept and deal with. Currently, our business, if you average the last two quarters, is about 30% from Asia. If you contrast that to five or 10 years ago, it’s grown dramatically. What we have said in the past is that we don’t believe our business will mimic our suppliers’ ratio. Most of our suppliers get more than 50% of their revenue from Asia. We think that, over the next two years or so, our business will be more like a third—35% or so. What that [situation] means is learning to deal in an environment of lower gross margins but higher asset velocity. Our ability to [increase] our operating-income ratio is going to be lower. It’s going to continue to improve, but the rate at which it improves is going to be lower because we are starting from a lower gross margin in Asia. With that said, our preoccupation over the last five years or so on return on capital has really allowed us to get back to the right point. Our return-on-capital matches year on year have seen progress that’s really phenomenal. It’s really been a by-product of learning to do business in Asia—Asia-style. It means turning assets quicker, controlling costs more readily. It does mean a different model for us, but, so far, we’ve addressed it successfully.

Do you have any closing thoughts on the year ahead?

It’s a big question right now. Maybe we have quarterly amnesia. Maybe we have this conversation every quarter. But it does seem that, because of all the high-level concern about the macro market, we are all kind of on standby right now. What’s the market going to do? Are we going to have a meltdown? We just don’t see it, but I wouldn’t want to be cavalier and suggest that we aren’t watching it and aren’t concerned about it. We will address whatever comes our way, but, for now, we feel pretty good about 2008.